Date: 19980728
Docket: 97-2263-IT-I
BETWEEN:
JOHN O'CONNELL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Rip, J.T.C.C.
[1] The key issue in these appeals from assessments for 1994 and 1995 is whether an allowance contemplated by subparagraph 6(1)(b)(iv) of the Income Tax Act ("Act") is received by an employee from the employee's employer as a full reimbursement for actual expenses incurred for travel, as claimed by the appellant, or is paid by the employer to compensate the employee to some reasonable extent for travel, as claimed by the Minister of National Revenue ("Minister") in making the assessments.
[2] At all relevant times, John O'Connell, the appellant, was the sole shareholder of 800546 Ontario Limited ("Ontario"), a corporation which owned 50% of the shares in J.O.C. Fashion Inc. ("JOC"). Another corporation, Your Man Inc. ("Man"), was related to JOC. Mr. O'Connell was president of both JOC and Man. Both corporations operated retail stores, one selling women's clothing and the other selling men's clothing in the St. Catharines, Ontario area. Mr. O'Connell was buyer for both corporations. As buyer, he travelled to Toronto approximately three times a week and to Montreal four times a year. He also drove to New York City once a year. Mr. O'Connell negotiated contracts for both corporations.
[3] Mr. O'Connell stated that JOC sells ladies high fashion clothing and the image of the retailer is important to manufacturers and their agents who sell designer clothing to JOC.
[4] In travelling to the various cities on behalf of JOC and Man, Mr. O'Connell uses a BMW 735(i) ("BMW") automobile which he purchased in 1993 for $66,040. The money was advanced to him by JOC and he repaid JOC $1,000 a month on account of both interest and capital. During 1994 the amount of interest paid by Mr. O'Connell was $3,633; the balance of the $12,000, namely $8,367, was on account of loan capital.
[5] There is no issue between the parties that Mr. O'Connell actually drove the distances he says he did. He maintained a diary of his travels and did not include in the distances travelled, travel between his home and office.
[6] At trial the parties agreed that the appellant's business use of the BMW was 79% in 1994 and 73% in 1995. In these years, Mr. O'Connell received mileage allowances from JOC and Man in the amount of $14,700 in 1994 and $13,600 in 1995. Apparently the appellant's total annual mileage was 17,350 in both 1994 and 1995, of which business mileage was 13,695 and 12,580, respectively.[1]
[7] Mr. O'Connell testified that he claimed an allowance of one dollar for each mile he drove for JOC and Man. There was no explanation given at trial for the difference between the business mileage and the amount received by Mr. O'Connell, given that he was to receive one dollar a mile.
[8] Mr. O'Connell was of the view that the allowance of one dollar a mile "seemed fair" and was the same amount he received from a publicly traded corporation of which he was a director.
[9] The appellant's position is that a reasonable allowance for travel expenses should be aggregate of the actual costs of operating the vehicle in the year and the annual depreciation or capital cost allowance on that vehicle. In 1994 the operating costs of the BMW were $7,381 and the capital cost allowance calculated by Revenue Canada was $7,038. In 1995 the operating costs of the BMW were $9,622 and the capital cost allowance calculated by Revenue Canada $4,927. The aggregate of the operating costs and capital cost allowance in each of the years was $14,419 for 1994 and $14,549 for 1995. The business portions of these amounts are $11,391 in 1994 and $10,621 in 1995.
[10] The mileage allowances received by Mr. O'Connell in 1994 and 1995 exceeded the business portions of the total amounts in each year by $3,309 and $2,979 respectively. The Minister included in the appellant's 1994 and 1995 incomes the excess amounts of $3,309 and $2,979, respectively, as a benefit the appellant received from the corporations in his capacity of an employee or, alternatively, in his capacity as a shareholder in accordance with subsection 6(1) and section 15 of the Act. In the Minister's view the excess amounts received by the appellant were not reasonable allowances for travel expenses in accordance with subparagraph 6(1)(b)(v) of the Act.
[11] The Minister accepted Mr. O'Connell's costs of operating the BMW in each of the years under appeal as a "reasonable allowance". However, he invoked paragraph 13(7)(g) of the Act and section 7307 of the regulations to the Act to limit the capital cost of the BMW to $24,000 plus federal and provincial taxes on acquisition of a vehicle costing $24,000. In the appellant's view, the Minister should look to depreciation, and not capital cost allowance, to determine what is a reasonable amount of depreciation or capital cost allowance in calculating the allowances. In the case at bar, according to the appellant, depreciation should be calculated on the basis of the BMW had a life of five years, as estimated by the appellant. If this were the case, then 20% of the actual cost of the vehicle would be added to the annual operating costs to determine a reasonable allowance.
[12] There are two matters that I must consider, firstly, what is an "allowance"[2] and secondly, what is a "reasonable allowance". The ordinary dictionary meaning of the word "allowance" includes: "a limited portion or sum" and "to put upon an allowance; to limit in the amount allowed".[3] These are common sense meanings of the word. The French version of subparagraph 6(1)(b)(v) uses the word "allocations" where the word "allowances" is used in the English version of the Act. Like the word "allowance", the word "allocation" contemplates the payment of a sum of money or the payment of a benefit.[4] The words "allocation" and "prestation" in the French language are synonymous.
[13] The automobile allowances paid by the two companies to Mr. O'Connell were, in effect, an attempt to reimburse him for his automobile expenses and depreciation on the vehicle. However, an allowance is different from a reimbursement. A reimbursement involves the payment of an expense of the employer by an employee and the recovery of that amount from the employer. The employee must account to the employer. An allowance is “an arbitrary amount usually paid in lieu of a reimbursement.”[5] It is a predetermined sum of money paid to an employee for certain kinds of expenses incurred by the employee. The employee can use the sum as he wishes without having to account for any expenditures.
[14] The amount a taxpayer receives from his employer as an allowance is included in his or her income unless that allowance falls within the exceptions listed in paragraph 6(1)(b) or subsection 81(3.1) of the Act or is excluded from income under subsection 6(6).[6]
[15] Subparagraph 6(1)(b)(v) allows reasonable allowances for travelling expenses received by an employee from his employer in respect of a period when he was employed in connection with the selling of property or negotiating contracts for his employer. Therefore, the requirements for this non-taxable allowance are: 1) selling property or negotiating contracts, 2) the allowance must be for travelling expenses, including motor vehicle expenses and 3) the allowance is reasonable.
[16] In R. M. MacDonald v. Canada, 94 DTC 6262, Linden, J.A., for the Federal Court of Appeal, stated at page 6264:
[. . .] the general principle defining an "allowance" for purposes of paragraph 6(1)(b) is composed of three elements. First, an allowance is an arbitrary amount in that it is a predetermined sum set without specific reference to any actual expense or cost. As I noted above, however, the amount of the allowance may be set through a process of projected or average expenses or costs. Second, paragraph 6(1)(b) encompasses allowances for personal or living expenses, or for any other purpose, so that an allowance will usually be for a specific purpose. Third, an allowance is in the discretion of the recipient in that the recipient need not account for the expenditure of the funds towards an actual expense or cost.
[17] Furthermore, with respect to the general philosophy of taxing allowances, Linden, J.A., stated in Verdun v. The Queen, 98 DTC 6175 at 6176 (F.C.A.):
[. . .] Even when these amounts are not used for any improper purpose, and even when they are reasonable estimations of the costs, our law treats them as additional remuneration, not as reimbursement of expenses, which require detailed receipts being submitted for reimbursement. This is felt to be necessary in order to ensure that allowable, reimbursed, personal expenses are accurately recorded and that the system is fair for all Canadians, even though extra accounting costs may be incurred.
[18] An allowance, therefore, merely attempts to compensate to a limited amount the employee for an expense the employee incurred in the course of the employee's employment. In certain circumstance the allowance may indeed cover the employee's out of pocket expenses. Paragraph 6(1)(b) lists those allowances, the amounts of which are not included in an employee's income from employment. However the allowances for travel or for the use of a motor vehicle must be reasonable: subparagraph 6(1)(b)(v), (vii) and (vii.1).
[19] The word "reasonable", of course, can mean all things to all people. At bar, the real issue in dispute between the parties is to what extent capital cost allowance should be considered as reasonable. The appellant wants to ignore capital cost allowance and rely solely on what is reasonable depreciation for the vehicle. In my view to determine what the word "reasonable" contemplates in subsection 6(1), reference ought to be made to other provisions of the Act which are concerned with travel allowances and the capital cost of a passenger vehicle. Guidance may be taken from paragraph 18(1)(r) of the Act and section 5307 of the regulations to the Act with respect to what Parliament thinks is a reasonable deduction of capital cost allowance and section 7306 of the regulations to the Act for amounts viewed as reasonable payment by an employer for kilometres driven by an employee in the course of employment.
[20] In computing income or loss from a business or property, paragraph 18(1)(r) limits the deduction available to a taxpayer in respect of an allowance for the use by an individual of an automobile in accordance with prescribed rules. Regulation 7306 sets out the limits for the purposes of paragraph 18(1)(r) for an allowance with respect to the kilometres driven by the employee. If the allowance exceeds these prescribed limits, the employee may only deduct the excess amount only if the excess amount is required to be included in the employee's income. As stated earlier, paragraph 13(7)(g) and regulation 7307 together place a ceiling on the capital cost allowance for passenger vehicles.
[21] I do not question Mr. O'Connell's testimony that the image of JOC, in particular, is helped when its suppliers see him driving a luxury automobile. The Minister appears to agree: he considered the costs of repairs and maintenance on the vehicle as a reasonable portion of the allowance in question.
[22] In determining what comprised a reasonable allowance to Mr. O'Connell, the Minister looked to limits the Act imposed on taxpayers claiming automobile expenses in computing income from a buttress, in particular the capital cost allowance provisions in paragraph 13(7)(g) and regulation 7307. This, in my view, is a satisfactory starting off point to determine what Parliament contemplated to be a reasonable allowance. The appellant has not convinced me that the Minister erred in referring to these provisions. Obviously Parliament wanted to limit the amount of capital cost allowance on a motor vehicle and put a ceiling on what it believes is a reasonable amount. To totally ignore paragraph 13(7)(g) and regulation 7307 would be to ignore the object and spirit of what Parliament considers a "reasonable allowance" for the purposes of subparagraph 6(1)(b)(iv). It may well be that the prescribed amount of $24,000 in regulation 7307 ought to be increased - the amount of $24,000 was fixed in 1991 and the price of passenger vehicles has increased substantially since then, as anyone who recently purchased an automobile can attest. In considering what is a reasonable allowance, I might have considered the capital cost of an automobile acquired in 1993 to have a ceiling slightly in excess of $24,000. This, however, was not pleaded nor did the appellant attempt to produce any such evidence.
[23] In the circumstances, the assessment ought not to be disturbed. The appeal is dismissed.
Signed at Ottawa, Canada this 28th day of July 1998.
"Gerald J. Rip"
J.T.C.C.
[1] The Minister did not query that the actual distances of the vehicle in both years were identical.
[2] The courts have considered the word "allowance" on many occasions. In The Queen v. Pascoe [1975] CTC 656, 75 DTC 5427 (F.C.A.), the Federal Court of Appeal held that an allowance must meet the conditions of 1) being limited and predetermined, 2) the amount must be paid to enable the recipient to discharge a certain type of expense and 3) the amount must be at the complete disposition of the recipient, who is not required to account for it to anyone. However, in Gagnon v. The Queen [1986] 1 S.C.R. 264, DTC 6179 (S.C.C.), Beetz, J., at page 275, modified the third condition of an allowance for the purposes of subsection 60(b) of the Act to state that “the recipient must be able to dispose of it completely for his own benefit, regardless of the restrictions imposed on him as to the way in which he disposes of it and benefits from it.” It should be noted that the Gagnon and Pascoe both considered the meaning of allowance in the limited context of alimony payments under subsection 60(b) of the Act.
[3] The Shorter Oxford English Dictionary on Historical Principles.
[4] See Petit Robert 1.
[5] Ransom v. M.N.R., 67 DTC 5235 at 5244 (Ex. Ct).
[6] See Revenue Canada Interpretation Bulletin 52R-Vehicle, Travel and Sales Expenses of Employees, dated March 29, 1996, at paragraph 40. Paragraph 40 describes correctly in my view the state of the law during the years in appeal.